Presented before the
Senate Committee on the Judiciary
February 7, 2001
Mr. Chairman and Members of the Committee, on behalf of the entire US Airways family, I appreciate the opportunity this afternoon to offer some additional comments on our merger with United Airlines.
There have been some significant developments in the aviation industry since I testified before the Antitrust Subcommittee last summer, when we first announced our merger. First and foremost, as a result of the intense competitive pressures at work in the marketplace, TWA has filed for bankruptcy, its third time in the last ten years. In connection with the bankruptcy filing, American Airlines has agreed to purchase TWA and provide immediate financing, allowing the airline to continue its operations. Second, American has agreed to acquire an equity interest in DC Air, the independent, new entrant carrier created from our merger with United Airlines, ensuring vigorous competition in the Washington, D.C. region. Third, American has entered into an agreement with United to initiate flights on a select number of routes from US Airways’ hub cities and to operate the US Airways’ Shuttle with United pursuant to a joint venture. Fourth, despite the best efforts of our hardworking and dedicated employees, US Airways reported a loss of $269 million for last year.
When I testified in June, I set forth in detail the driving forces behind our decision to merge with United, namely, our desire to provide comprehensive, global air service to our customers and our communities, while preserving jobs, service, and significantly enhancing competition. Importantly, the events that have transpired since my prior testimony serve to significantly enhance the pro-competitive, pro-consumer, and pro-employee benefits of our merger.
US Airways continues to be unique in the airline industry. There is no longer any other carrier in the country like us. We are the last mid-sized, mature-cost airline that remains out of an original group of six pre-deregulation carriers. All of the others have either gone out of business and disappeared completely, e.g., Braniff, Eastern, and Pan American, or while still operating, have gone through multiple bankruptcies, e.g., Continental and TWA (now, for the third time).
Neither of these options, in my estimation, is an attractive alternative because of the serious disruption and uncertainty they would bring to our employees, to our passengers, and to the communities we serve. They are, however, real threats given US Airways’ unique position. Accordingly, the status quo is not a viable option for US Airways, our employees, or the communities we serve. Let me explain.
US Airways in its current form is an amalgamation of several small, pre-deregulation regional carriers such as Allegheny, Mohawk, and Piedmont. As a result, the airline has a route network that, like its regional airline predecessors, is largely confined to short-haul routes in the eastern United States. Indeed, US Airways has the shortest average stage length of any major carrier. Combined with a route structure that is essentially confined to the East Coast corridor, this severely limits US Airways’ ability to mass enough presence in other areas to support any material expansion of its system.
As a consolidation of pre-deregulation carriers, US Airways also pays labor rates that are comparable or higher than those of American, Delta, Northwest, and United. The difference between US Airways and these other carriers, however, is that the other carriers have vastly larger route systems which permit them to spread their costs over a great number of more efficient, long-haul segments that are relatively less costly to operate.
Caught in the vice between its short-haul, high cost route system and its mature labor structure, US Airways is far and away the highest unit cost U.S. airline. For the year 1999, US Airways’ average system cost per seat mile, the measure most commonly used to determine costs, was approximately 14 cents. By comparison, the average system costs during the same period were approximately 9.5 cents per seat mile for the major carriers and 7.5 cents for low-cost competitors such as Southwest. In sum, when compared to Southwest, a carrier that is aggressively expanding throughout US Airways’ East Coast operating territory, US Airways has costs that are nearly twice as high.
When I joined what was then USAir five years ago, I recognized the historical reality that placed US Airways in such an “in-between” position—one that could not be sustained over the long run. US Airways was neither a “national” carrier with an extensive nationwide network, nor a “regional” carrier with low costs and point-to-point routes. Accordingly, with the support of our employees, we committed to a strategic plan to restore financial stability to the company and establish the carrier’s competitiveness, despite our high costs and incomplete route structure. To this end, we have made enormous progress. We have made significant and sustained improvements in our operational performance, established harmonious labor agreements, begun fleet modernization, and expanded our international service.
However, the fundamental problems that constrain US Airways—high costs, short segments, and a limited network—remain in the face of increasingly intense competition. Unfortunately, US Airways does not have the financial reserves or the cost structure to support significant internal expansion.
Meanwhile, competition from well financed, well managed low-cost carriers such as Southwest, JetBlue, AirTran and others has been increasing dramatically on US Airways’ most heavily traveled and most profitable routes. In 1995, for example, low-cost carriers had 618 departures per day in the eastern United States, US Airways’ major service area. By 2000, that number had almost doubled to 1,098. These carriers now offer more than one out of every four domestic seats up for sale in that region. At the same time, major carriers’ share of capacity actually fell one percent.
In the last year alone, Southwest, AirTran and Delta Express, as well as new entrants such as JetBlue and Spirit, have added 181 daily departures out of East Coast airports – a 25.5 percent increase over 1999. Since January 1, 1996, Southwest has increased its intra-East route system in terms of daily departures by 238% (157 to 531) and in terms of aircraft by 326% (19 to 81).
Facing ever more low-fare competition on its key eastern routes, with costs well above the industry average and no realistic way to alter that condition, US Airways is increasingly limited in its ability to support its route network and achieve profitability. Accordingly, as a stand-alone carrier, US Airways, which has sustained huge losses over the past decade, does not have the luxury of maintaining the status quo.
Neither did TWA and its fate is an example of what can happen. Over the past decade, TWA has been forced to reduce its employee base by almost half. Moreover, its once extensive global route network has similarly decreased, from 216 nonstop routes in 1989 to 114 in 2001. In sum, over the past decade, TWA has shrunk to a shell of its former self in a valiant, but now apparently unsuccessful attempt to survive.
Fortunately, the downsizing we have witnessed with other carriers is today not the only option for US Airways and our employees. There is a viable alternative that allows US Airways to become part of a broader and more efficient transcontinental and global system, thereby preserving jobs, ensuring service to scores of communities that otherwise could lose flights, and enhancing competition in the industry—our merger with United Airlines.
For US Airways, this merger will help us provide the efficient, global service that our valued customers demand and deserve. Moreover, by merging with United, service to US Airways’ communities of all sizes will be preserved, ensuring continued rather than decreased competition. The creation of DC Air, a vibrant, minority-owned airline that will have the benefit of American’s frequent flyer program and access to its extensive network, will also add a new competitor based in the Washington, D.C. region with service throughout the eastern U.S.
At the same time, thousands of high-paying, union jobs will be protected at a time of increasing economic uncertainty. For nearly a decade, the employees of US Airways have faced periods of uncertainty about the future of the company. Now they are guaranteed a secure future with a financially strong, global carrier.
I have been involved with this industry for over 30 years, and I understand, and appreciate, that there is some concern about consolidation and the potential effect the two mergers we are discussing today will have on consumers. But we cannot examine these issues without recognizing the fundamental forces that are at work in today’s deregulated marketplace and acknowledging what will happen if the transactions do not take place. Who would have thought 20 years ago that Southwest would be the second largest domestic carrier in terms of passengers carried and have, by a wide margin, the highest market capitalization of any carrier in the world, that the original Pan Am would be gone, and that TWA would be entering its third bankruptcy. Nonetheless, these changes are happening, and the question is whether the proposals we are discussing today to deal with these changes are good for consumers, employees, and the traveling public.
In my view the answer is a resounding yes. The combination of US Airways and United will result in a truly efficient nationwide network that will preserve jobs and service, and enhance competition. Both the economy and consumers will reap the benefits of this enhanced competition and improved service, and importantly, more than 45,000 employees of US Airways will keep their jobs.
The same can be said of American’s proposed transactions. Like the US Airways/United transaction, American’s purchase of TWA, as well as an equity position in DC Air, is not an issue of consolidation, but one of saving jobs, maintaining service, and preserving competition. These transactions greatly enhance the scope and scale of American’s route network, transforming American into a truly national carrier. By purchasing one-half of US Airways' shuttle operations, American dramatically increases its presence in three premier eastern markets—Washington, New York, and Boston. And by obtaining gates and terminal space at several eastern airports, including Philadelphia and LaGuardia, and agreeing to operate flights on certain routes from US Airways’ hub cities for up to ten years, American ensures that consumers on these routes will have competitive air service.
Significantly, American's proposal to purchase 49 percent of DC Air will directly link DC Air to a vibrant, financially strong major carrier, ensuring competition in the Washington metropolitan area over the long term and delivering important consumer benefits to DC Air passengers. DC Air will be a participant in American's frequent flyer program and will be linked to American's expansive domestic and international network.
As a former Chairman of United Airlines, I can attest to the fact that, despite the comments of some pundits who have declared that American and United are attempting to divide up the eastern seaboard, American and United are vigorous competitors and intense rivals. The proposed transactions under consideration today will introduce the benefits of this competition into new markets in the eastern United States, where Delta traditionally has been, and is, a leading force. They will also bring vigorous competition, innovation, access to the global marketplace, and sustained employment and job growth for airline workers. Importantly, by extending their rivalry into east coast markets, United and American will position themselves to be vigorous international competitors in the emerging open global aviation marketplace. This is a win/win for consumers. Millions of passengers begin or end their international trips in the eastern United States, and many new communities will now have seamless access to efficient global networks. At the same time, United and American will be better positioned to compete in the new global marketplace where there are no guarantees. We know all too well, as we have witnessed radical changes in other industries, that American businesses will face increasingly challenging competition from their foreign competitors.
It will serve us all well to think outside the box. This is a dynamic, changing global industry. We cannot – and we do not want to – preserve the status quo. We must learn from our experiences in other industries – autos, steel, finance, aircraft manufacturing. We have an historic opportunity to create our first truly national and international network carriers—Delta, American, and United—who will compete vigorously with each to flow traffic over their systems, and, a vibrant group of new-entrant and low-cost carriers—led by Southwest, AirTran, and JetBlue—providing additional point-to-point competition.
For most of the last century, U.S. aviation led the world in technology, efficiency, innovation, and the development of free markets. We are now in a period of revolutionary change. The U.S. industry is responding to dynamic market forces and positioning itself to maintain and enhance its leadership position. That same bipartisan government, which first saw the wisdom of deregulation over 20 years ago and last year passed historic legislation for this industry in AIR-21, must not now constrain the industry’s capacity to respond to marketplace forces. The U.S. must continue, as it has during the first century of flight, to create conditions for innovation, efficiency, and growth, and to respond aggressively to real problems such as adequate infrastructure, air traffic control, and capacity that are serious threats to our industry.
Thank you for the opportunity, once again, to share my perspective with you.